Coca-Cola Beats 2Q17 Estimates, Raises EPS Growth Outlook

Aided by an increase in demand for healthier non-carbonated beverages and sugar free sodas, Coca-Cola Company (NYSE: KO) reported better than anticipated fiscal 2017 second-quarter revenues and earnings. However, revenues and earnings fell 16% and 60%, respectively, compared with second-quarter of fiscal 2016. Additionally, as discussed below, the company faces several other issues due to which the share price would likely remain bearish in the short-term. The stock of Coca-Cola ended yesterday’s trading session at $45.64.

The Atlanta based company reported 2Q17 net income of $1.371 billion, or $0.32 per share, on revenues of $9.70 billion. The revenue estimates of FactSet analysts were $9.60 billion. A year earlier, Coca-Cola reported net income of $3.448 billion, or $0.79 per share, on revenues of $11.539 billion. The steep decline in the net profit is partly due to refranchising of its North American business. During the quarter, Coca-Cola spent $653 million on refranchising initiatives. The negative impact of currency exchange rate translation also resulted in a decline in the net income.

Excluding asset impairment/restructuring charges, transaction gains/losses, and equity investees, among others, the Q2 2017 non-GAAP net income was $2.546 billion, compared with $2.619 billion in the same period a year ago. On a per share basis, the earnings of $0.59 per share in the recent quarter were lower than $0.60 per share reported last year, but greater than Consensus estimates of $0.57 per share. The non-GAAP profit beat estimates mainly because of higher profit margin, which offset more or less flat sales, compared to last year.

In North America, volumes were flat from last year. There was slightly positive growth in juice, dairy and carbonated drinks. However, volumes for enhanced water and sports drinks declined during the quarter. Internationally, during the second-quarter, calorie free soda drinks sales volumes increased in mid-single digits.

Coca-Cola raised its FY17 earnings guidance slightly. The company now expects earnings per share to either drop 2% or remain flat, instead of the previous outlook of 1% to 3% decline. Coca-Cola still anticipates organic revenue to increase 3%. New guidance implies a profit of between $1.87 per share and $1.91 per share for FY17. The Consensus estimate of Thomson Reuters is $1.89 per share.

The forward PE ratio of the company is 24x, which is almost equal to fast growing social media companies such as Facebook inc.
Furthermore, similar to Pepsi, Coca-Cola does not have a non-beverage business, which can offset the declining volumes. Thus, a decline in second quarter revenue and earnings, flat volumes, and lacklustre guidance is expected to keep Coca-Cola bearish.

The stock of Coca-Cola, which is facing resistance at 45.80, has made a bearish crossover below the 50-day moving average. Additionally, the Chaikin money flow indicator is moving below the zero line. Thus, we anticipate a decline in the share price. On the downside, the stock has support at 44.50.

To benefit from the downtrend, we wish to purchase a low or below option from an approved binary broker who offers contracts expiring in a week. We prefer to enter when the stock trades near $45.50 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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